Wednesday, March 04, 2009

Life Imitates Countercolumn

Typically, the FDIC's been able to carve out 50 cents on the dollar of saleable assets from banks it has had to shut down. But that's in an environment where asset prices were overinflated and there were buyers available. It wouldn't get anywhere close to 50 cents on the dollar today. Meanwhile, there would be all kinds of family-friendly entertainment as the FDIC struggled to sell its own assets (mostly treasuries) and rescue what was left of its cash and cash equivalents in its reserve fund to pay off depositors.

The FDIC was designed to pick up the occasional local bank failure, and one or two larger banks, so long as they didn't happen too close to one another.

It cannot absorb the Citigroups. It cannot absorb the Bank of Americas. One of these would wipe out the fund. Once FDIC was wiped out it would cause a run on the others. Congress would have to authorize another 500 billion or a trillion overnight to make good on FDIC promises and recapitalize FDIC. They would HAVE to. And then pray that there were still treasury buyers out there. If there is still a market for treasuries, it's going to be at the expense of the money markets, as public debt crowds out private.